Wednesday, December 26, 2007

Odds On A Rate Cut for the January 30 Monetary Policy Meeting Now at 76%

The Federal Reserve has been auctioning off big bundles of money to U.S. financial institutions in recent weeks, and news that the Fed will continue using its Term Auction Facility (TAF) to pump money into the banking system has caused the odds on a rate cut for next month to decline. The fed funds futures market, however, is still betting that the Fed will opt to lower short-term interest rates again on January 30.

The odds on a cut for the benchmark Fed Funds Target Rate at the next Federal Open Market Committee (FOMC) meeting are now at 76%. Influencing the futures market last week:

On Wednesday, the U.S. Energy Information Administration (EIA) reported that crude oil inventories dropped by 7.6 million barrels during the week that ended on December 14. This puts upward pressure on prices at a time when Americans living in cooler climes are buying heating oil, and the Fed is already worried about rising prices.

On Thursday, the Federal Reserve Bank of Philadelphia released its index of manufacturing conditions within the Fed's Third District. For December, the index came in at -5.7, while economists were expecting around +6.2. Any figure below zero indicates that manufacturing in the Fed's Philadelphia region is contracting, while a positive figure implies expansion. The Fed's Third District includes all of Delaware, parts of southern New Jersey, and a large portion of eastern Pennsylvania.

The New York-based Conference Board released its report on the nation's leading economic indicators on Thursday. For November, leading indicators declined by 0.4%, while economists were expecting a decline of about 0.3%.

The University of Michigan's Consumer Sentiment Index has been declining since September of this year. For December, the index came in at 75.5; the index was at 83.4 for September. Somber news from a consumer spending perspective. The baseline score of 100 is pegged to U.S. consumer sentiment during 1966.

Then again, American consumers may keep on spending regardless of their concerns about the economy. According to the Commerce Department, consumer spending rose by 1.1% during November, the biggest increase in over three years. Great news for the U.S. and global economies, but increased spending also means upwards pressure on prices, and the Fed doesn't want to be forced into raising rates right after completing a rate-cut cycle.

The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 76% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the January 30TH, 2007 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will be cut to 7.0% at the January 30TH FOMC monetary policy meeting: 76% (likely)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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